TaxTMI 
TaxTMI 
2022 (9) TMI 351
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....acquisition cost of participating interests in various blocks amounting to Rs.174,52,34,343/- by not considering the fact that the expression "licences" used in section 32(1)(ii) of the Act applies to licences that are relatable to intellectual properties only and not relatable to all type of licences. 2. On the facts and circumstances of the case and in law, the Ld.CIT{A) has erred in deleting the disallowance of acquisition cost of participating interests in various blocks by not considering the fact that in AY 2002-03, the Hon'ble ITAT has erred in granting relief to the assessee by wrongly invoking provisions of Section 32(1)(ii) of the Act and that the Revenue is already in appeal against this decision before the Hon'ble High Court of Delhi. 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance of acquisition cost of participating interests in various blocks by ignoring the fact that section32(1)(ii) of the Act, has a narrower scope and must be given strict and plain interpretation than what was envisaged and allowed by the Hon'ble ITAT. 4. On the facts and circumstances of the case and in law, the Ld.C....
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....the fact that the claim of the revenues amounting to 1453.31 million has been forwarded by the company to MEM during the year which shows that the revenue has not only accrued but crystallized during the year and the same should have been taken into account for calculation of profits. 10. On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in deleting the disallowance of claim of preacquisition expenses amounting to Rs.79,18,87,613/- by ignoring the fact that pre-acquisition expenses are covered within the scope of section 42 and the method prescribed under section 42 agreement are binding on the assessee as the same are special provisions sanctioned by Parliament and have overriding effect. 11. On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in deleting the disallowance of claim of preacquisition expenses amounting to Rs.79,18,87,613/- by ignoring the fact there cannot be a double claim for the same expense once under any provision of the Act and then u/s 42 of the Act. 12. On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in deleting the disallowance of claim of preacquisition expenses amoun....
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....participating interest in respect of Sakhalin 1 Project, Block A-I & A-3 Myanmar Project, Sudan Blocks 5A & 5B Projects, Ivory Coast Project, 81-1 Libya Project, Egypt, Qatar, Block 127 & 128 Vietnam Project and Cuba Project. As per the return of income filed, the assessee company has claimed depreciation on acquisition cost of participating interests @25% holding them as intangible assets and the total depreciation claim was to the extent of Rs.174,52,34,343/-. Claim of depreciation was made on various production sharing contracts through which the participating rights were acquired by the assessee company in the above projects. AO following similar disallowance made in A Y 2006-07 held that the expression 'licences' used in see 32(1)(ii) of the Act to apply to licences relatable to intellectual properties only and not to all licences. AO held that u/s 32 of the Act depreciation is not allowed on all capital assets but is allowable on capital assets which fall in any of the categories enumerated in the section. Accordingly, the assessee's claim of depreciation of Rs.174,52,34,343/- on participation right of the above joint venture were disallowed and added back by the ....
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....n dismissed by Hon'ble Delhi High Court. Therefore, ITAT held that in absence of any distinguishing feature, the CIT(A)'s order is upheld and the ground raised by the Revenue is dismissed. 8. Ld. DR in this regard submitted that ld. CIT (A)'s order is erroneous and it needs to be seen that whether the assessee company satisfies the required condition of section 32 of the Act or not. He submitted that the provisions of section 32 are not complied herewith. He further submitted that Revenue's appeal for AY 2002-03 was dismissed by Hon'ble High Court not based on the facts of the case as the appeal was dismissed for delay in filing of the appeals. 9. Per contra, ld. counsel of the assessee submitted that the issue is fully covered in favour of the assessee by the aforesaid decisions of ITAT i.e. for AYs 2002-03 to 2005-06. The Revenue's appeals have further been dismissed by Hon'ble Delhi High Court. Further, it was submitted that Revenue did not challenge the order of ITAT in AY 2006-07. Ld. counsel further submitted that the claim of depreciation should also be allowed vide Circular No.20/2019 dated 19th August 2019 issued by CBDT. 10. Upon careful consideration, we find that the....
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....duction begins. In case of abandonment the entire costs may be allowed over a period of 10 years as per the agreement. As such for the year under consideration the claim of depreciation on support equipments at Myanmar Block A-I & A-3, Libya Block NC- 188, NC- 189, Block 81-1, Iran Farsi Block, Syria, Egypt and Qatar where joint venture projects for which commercial production has not yet started totaling to Rs.95,36,8501- were disallowed by the AO and added to the income of the assessee along similar lines as in A. Y. 2006-07. 12. Ld. CIT (A) decided the issue in favour of the assessee by observing as under :- "4.2.2 From the submission of the Appellant it is evident that the disallowance relates to depreciation on supporting equipments such as computers, vehicles, office equipments etc. that were used by the Appellant for its business purposes. The Appellant is engaged in the business of hydrocarbon exploration prospecting and production for last many years. In the course of its business, it continuously acquires rights in new oil fields to continue its business of exploration / prospecting / production of hydrocarbons. Therefore, the projects which are in exploration and sett....
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....owable or not. The expenses in this case are miscellaneous expenses and legal charges for the proposed cement factory project. This expenditure is not related to the setting up of a new factory, it pertains to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, may incur expenditure for obtaining a project report or legal opinion regarding the viability of such project. This cannot, in our view, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business will not be allowable as deduction. Such expenditure is unmistakably connected with the running of the business." 4.2.5 Division Bench of Hon'ble Delhi High Court in CIT V. Goodyear India Ltd. [2000] 243 ITR 239 relied upon Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224lTR 342 (SC) and concluded that it is now well settled that when expenditure is incurred for the expansion / extension or for the betterment of the product which was already being produced, and/or the im....
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....cquires participating interest in other oil block, it is only an expansion of the business in which it is engaged. Support equipments are like other fixed assets and as such depreciation is allowable on cost incurred for acquisition of such assets during the year and also in respect of WDV of other block of assets acquired in the preceding years. * Support equipment are for the purpose of the business and details of related oil blocks are enclosed in paper books. 15. Upon careful consideration, we find that depreciation on these support equipment has already been allowed in earlier year. There is no change in facts or law in this year. Hence, there is no reason why Revenue should change its stand and disallowed depreciation. The case laws referred by ld. CIT (A) as well as the ld. counsel of assessee are germane and support the case of assessee. Hence, the order of ld.CIT (A) is upheld. 16. Another ground relates to deletion of disallowance of claim of expenses pending settlement of EPC contract of Rs.145 crores. 17. On this issue, AO has dealt the issue as claim of Rs.998.74 million as explained during settlement of EPC contract but not recognition of revenue to the extent of....
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....n as approved by ONGC (consultant) was provided in the books of account and was claimed as an expenditure in the return of income. The assessee forwarded the counter claim to its customer, MEM amounting to Rs.1524.20 million (assessee's share being Rs.1371.78 million) which has not been accepted by the MEM. Therefore, the assessee did not consider any revenue on this account in its books of account on the ground that the assessee cannot be said to have acquired any right to receive such income till the time the claim is accepted by the MEM. According to the Assessing Officer, since the project has been completed in the relevant assessment year, the assessee acquired certain right to receive such amount from MEM and the same was taxable in the hands of the assessee on accrual basis and, accordingly, made an addition of Rs.149.31 lakhs to the total income of the assessee. Alternatively, he held that if the assessee's claim of treating the revenue as nontaxable on account of it being unascertained is accepted in appeal, then, the provision made by the assessee for the expenses to the extent of Rs.1026.08 million should be disallowed on matching principles and on the same logic as per ....
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....e being Rs.1493.10 million claimed by the EPC contractor is pending in arbitration in its entirety. The claim of the EPC contractor has not been accepted by the assessee company. Part of the cost of Rs.1524.20 million (company's share being Rs.1371.78 million) claimed by the company has been forwarded to MEM for their approval. It has been clarified before the CIT(A) that no payment has been made by the assessee company to the contractor for which the ld.CIT(A) has given the finding that neither the additional cost claimed by the EPC contractor has been accepted nor any part of it has been paid. Therefore, the CIT(A) held that the liability towards the additional cost claimed by the EPC contractor has not arisen to the company during the relevant year. Thus, we find that while claim made by the assessee to EPC contractor has not been accepted by them, the claim made by the EPC contractor against the assessee towards additional expenditure though admitted by the assessee in its books of account is under litigation and no amount has been paid. We, therefore, find merit in the findings given by the ld.CIT(A) that the additional expenses of Rs.1026.08 million provided as expenditure by....
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....oss arising on account of such fluctuation had been erroneously offered to tax/claimed in the respective A Y s despite the fact that no such sum had accrued. The AO had accepted such claim/income and not raised any issue. * Since the claim made in A Y 2006-07 had not been allowed by ITA T, such foreign exchange gain/loss should have reduced/added to total income as it had been erroneously offered to tax/claimed. * Further, for AY 2006-07, the- Company made a counter claim to MEM which was rejected by the Legal department of MEM. The Company did not book any income during AY 2006-07 to AY 2014-15 on account of such claim as the same was not accepted by MEM and no income accrued to the Company. * However, the AO made an addition of the reinstated value of claim made by the Company to MEM on protective basis in the order passed for AY 2007-08 to 2014-15. * The Ld. AO in his order has referred to the matching principles which is inapplicable in the instant case as the assessee has not claimed any expenditure during the AY 2007-08 to 2014-15 as detailed above. * The figures adopted by the AO are as under: AY Amount (in INR million) 2007-08 1,806.57* 2008-09 1,654.88 200....
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....ection 32. He noted the following from the ITAT decision and decided the issue in favour of the assessee :- "4.4.3 Similar additions was made in A Y 2002-03 which was deleted by Hon'ble ITAT. In AY 2004-05 and AY 2005-06 similar additions was deleted by Id. CIT(A) following the decision of Hon'ble ITAT. In AY 2002-03 Hon'ble ITAT in ITA No. 472/0/08 in its decision dt. 30.10.2009 while allowing the claim of the assessee held: "With regard to disallowing claim of expenses of Rs.43.85 lacs incurred for purchase and evaluation of the seismic data of foreign blocks, on the plea of same being capital in nature, we found that assessee being engaged in the business of exploration and production of hydrocarbons in other countries to augment the oil resources of India, it was continuously evaluating various business opportunities before acquiring a particular field/block. Since all these opportunities have to be evaluated and studied before taking decision to invest and enter into a contract, the process of evaluation of the block started with submitting tender fee/data fee etc. and then the seismic data had to be evaluated in seismic processing center. After evaluating the ....
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....n between contract projects for which agreement is entered into and the board approved projects i.e. projects for which no agreement/contract has been entered. The assessee used to capitalize expenditure incurred on projects for which no agreement/contract has been entered, however, the cost of such projects which are abundant was written off over a period of five years in the books of account of the assessee. The assessee had claimed the expenses pertaining to abandoned project as revenue expenses. The expenditure incurred for this purpose was in the nature of travel cost, meeting and conference expenses, delegation, salaries and professional fees etc. These expenditure were claimed by the assessee in its return of income in the year of its incurrence. The issue under consideration is covered in favour or the assessee by the order of Bombay High Court in the case of CIT Vs. Essar Oil Ltd. 2008 TIOL 530 wherein the High Court has observed that submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure before submitting its bid. If the assessee is not successful in....
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....incurred on exploration activities u/s 37 of the Act carried out in Farsi block, Iran under a service contract. 33. Brief facts of the case are that AO erred in making an addition of Rs.121,38,27,143 being the expenses incurred in respect of the exploration activities of Farsi Iran Block. As per schedule 25 (Para 13) of notes on accounts the company in consortium with other partners has entered into an Exploration Services Contract (ESC) with National Iranian Oil Company (NIOC) in respect of Farsi Block Iran. The Company drilled exploratory wells in the block during the year and a provisions has been made in respect of the expenditure incurred on exploratory wells (Rs.1,287.30 million) pending declaration of commerciality and award of development service contract by NIOC. The assessee made the above provision of Rs. 1287.30 million on this count even though service contract for development/exploration have not even been awarded to it. The Statutory Auditor have qualified that provision for wells drilled Rs. 128,72,98,865/- was made under Service Contract (Iran) for which the commercial discovery has still not been accepted by NIOC. Out of the total amount Rs. 1213.83 million perta....
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....that expenditure wholly an exclusively for the purpose of business cannot be disallowed merely because the assessee income or the turnover would be very much reduced thereby. In view of the above legal position the disallowance made by the AO cannot be sustained. The appeal is allowed in this ground." 35. Ld. CIT DR submitted that this issue is to be governed by Section 42 of the Income Tax Act and he referred to the decision of Hon'ble Supreme Court in the case of M/s. Enron Oil and Gas India Ltd. (supra). 36. Ld. counsel of the assessee submitted that assessee had entered into an exploration service contract with NIOC for Farsi Block in the year 2002. Under the said contract, all the funds required for exploration operations were to be provided by the assessee and to be reimbursed by the NIOC upon signing a development service contract (upon establishment of commercial field). The assessee had incurred Rs.7,34,71,772/- during the AY 2006-07 and the AO had accepted the claim of deduction of expenditure incurred for the relevant year. Further contentions of the ld. counsel of the assessee is as under :- * The assessee had incurred further expenditures on exploration activities ....
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....,000 as prior period income in respect of 50% of survey expenses written back in relation to Sakhalin project without appreciating that the assessee had not claimed the deduction for aforesaid expense by filing the revised return of income for A Y 2006-07. During the relevant Assessment Year, the assessee had written back liability in respect of 50% of survey expenses in relation to Sakhalin Project. Since the liability was contingent in nature, the assessee has written back the same in its books of accounts for A Y 2007-08. It was further submitted that the assessee in its revised return of income for A Y 2006-07 has given up the claim of deduction made earlier, therefore prior period income was not offered to tax in the subject assessment year. The AO held that no evidence of revision of return of A Y 2006-07 has been furnished and therefore made an addition of' 334,765,000 to the income of the assessee on this account. 40. Ld. CIT (A) deleted the addition by holding as under :- "4.8.2 In the AY 2006-07, the Company had claimed Rs.3,206,077,138 as deduction u/s towards exploration expenditure for Sakhalin project. Subsequently, due to write back of liability amounting to R....
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....ein has been pointed out to persuade us to remit the matter to AO, hence we uphold the order of ld. CIT (A). 44. Another issue relates to AY 2009-10 relating to revision of opening and closing stock. 45. On this issue, ld. CIT (A) has dealt with the assessee's request that since the value of closing stock has been increased in AY 2008-09, in AY 2009-10 the value of opening stock should also increase. The ld. CIT (A) has noted the assessee's submissions as under :- "3.27.1 In the audited accounts for the financial year (FY) 2007-08 relevant to the assessment year (AY) 2008-09, the closing stock was computed at Rs. 155.11 million which inadvertently included Rs. 56.61 million being value of crude oil in the pipeline till the delivery point in relation to Sudan 5A project which should be excluded as per COTA agreement. Appellant revised its return of income for the A Y 2008-09 and exclude Rs. 56.61 million from the value of closing stock and corresponding reducing income. Copy of relevant extract of audited financial statement of FY 2008-09. However, the Ld. AD in completing the assessment (AY 2008-09) has not accepted the above claim and had increased the income by Rs. 56.61 mill....
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....AY 2009-10. * The assessee had accordingly requested the revenue to provide the benefit of increased opening stock in AY 2009-10 which has been allowed by the CIT(A) in the AY 2009-10 and the affect to same has also been provided. 48. Ld. CIT DR in this regard submits that the issue involves factual issue and may be remitted back to the file of AO. 49. We find that ld. DR has not disputed the CIT (A)'s finding and he is only submitting that this is a factual issue and may be remitted to AO. We find that this is exactly what ld. CIT (A) has done. The CIT (A) has noted the assessee's submissions and held that AO may consider the same. Hence, Revenue's ground in this regard is misplaced and hence dismissed. 50. Another issue raised in AY 2009-10 onwards is contribution to abandonment account. 51. On this issue, the matter pertains to contribution made to site restoration fund also known as abandonment account. AO stated that the amount deposited by the assessee was in the nature of a provisional liability which had not arisen during the year. That the claim was an expense which was to be allowed in future years and was a claim which was not acceptable in view of the decision of ....
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....the Appellant has contributed Rs.60,219,264 towards abandonment liability for the months June 2008 to January 2009 as per monthly contribution notice of operator (ExxonMobil)/Foreign Party Administrator (JP Morgan Chase Bank, UK). In the books of accounts, the Appellant created a provision for abandonment liability of Sakhalin project (Block) by debiting 'Producing Property A/c' (Schedule 5 of Financial Statements) under assets side. Therefore, there is no impact on Profit & Loss account due to the above provision made in the books. The asset standing under producing properties are charged off to the Profit & Loss account on annual basis through depletion. During the year, the amount charged off to Profit & Loss account as depletion has been added back in the computation of income. Hence, no deduction on account of provision for abandonment cost has been claimed in the ROI filed. During the course of the assessment proceedings, the Appellant has made the following claims by filing a revised computation before the AO: Particulars Amount Contribution to Abandonment Account for June 2008 to January 2009 made in AY 2009-10 60,219,264 Interest on Abandonment Account ....
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....eing the amount of contribution for the month of February 2009 & March 2009 on account of abandonment liability of Sakhalin Project deposited with JP Morgan Chase 8ank should be allowed as deduction under section 37 of the Act in assessment year 2009-10. The above additional ground has been raised by the Appellant on the premise that the Appellant being a Company is required to follow mercantile basis of accounting and therefore the liability for contribution to abandonment account for site restoration for the month of February and March 2009, though deposited in the next financial year but pertains to AY 2009-10 and hence should be allowed as deduction in AY 2009-10." 54. Considering the same, ld. CIT (A) gave a finding that the expenditure is for business purpose and was allowable u/s 37 of the Act. He has held as under :- "12.8. It is relevant to note that the AO has not doubted that the appellant has to incur this liability. The issue is whether it will be allowed as an expense in this year or in future years. 12.9. In my View, the expenditure is clearly for business purposes and it has been incurred during the year. The appellant cannot get back any amount from the fund....
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....visional in nature or not. This is also fortified by the fact that the foreign exchange fluctuation gain earned by the assessee has also been claimed as an expenditure. Reliance is also placed on the relevant clauses of the agreement wherein the assessee is required to contribute to the abandonment account. The same would be argued at length based on these clauses as well." 56. The submission of ld. counsel of the assessee in this regard is as under :- * The aforesaid claim represents contribution to site restoration fund. * The assessee made a contribution to abandonment account on account of Sakhalin Block as mandated by the PSA entered by the assessee and the Government of Russia. * Such liability is quantified on monthly basis by operator/ FPA and is actually paid by the assessee within due dates on the basis of payment notices issued by the operator / FPA. In other words, the contribution amount deposited in each month is in accordance with payment notice issued as per the terms of PSA and represent pro-rata cost of the abandonment plan. * The said sum is not a provision. The mere fact that the assessee had an option for providing corporate guarantee and/or to make de....
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....ted January 16, 2015 submitted to the TPO an additional benchmarking analysis conducted using Loan Connector database. In the said submission the appellant submitted that the effective interest rate paid by the comparable companies was 1.40% (average 6-month LIBOR plus a spread of 0.81 %) as against the interest rate of 2.5% earned by the appellant. Accordingly, it was claimed that the appellant's international transaction of receipt of interest from ONGC Caspian was at arm's length from an Indian TP perspective. 63. The TPO relied upon his own order for the earlier AY i.e. AY 2010-11 where the loan transactions chosen by him pertained to AY 2010-11 rather than 2011-12 i.e. the year under reference. The loan transactions chosen by him are tabulated below. Company Name Date Deal amount (in million USD) Tranche months Mc Clatchy 11-Feb-2010 547.38 41 Ford Motor 24-Nov-2009 7,937.35 49 64. However, during the course of the TP assessment proceedings, the TPO considered the credit rating of ONGC Caspian as "CCC" and determined the interest rate of LIBOR plus 500 basis points as the Arm's Length Price ('ALP') and proposed an addition amounting to INR 8,648,5....
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....also compared well with the rate of interest arrived by the assessee. The TPO has used the data regarding loans which pertains to earlier years where the loan was for a period of 3 years. As the loan given by the assessee was a bridge loan for less than 6 months and has been repaid during the financial year itself, we find that the adjustment made by the TPO has rightly been set aside by the ld. CIT (A). Accordingly, we uphold the order of ld. CIT (A) on this issue. ASSESSMENT YEAR 2013-14 68. For this year, the TPO has made transfer pricing adjustment on loan provided to Jarpeno. Jarpeno acquired Imperial Energy Corporation Plc., UK ("Imperial") in January 2009, for which consideration was advanced by the Appellant to Jarpeno. Subsequently, the Appellant extended advances to Jarpeno to acquire the shares of balance shareholders. The advances were in the nature of long-term investment by the Appellant into Jarpeno. During FY 2012-13, the Appellant advanced foreign currency loan from internal accruals, amounting to INR 1,29,15,19,936 to Jarpeno. The Appellant charged interest at the rate of 4% on such advance provided to Jarpeno. 69. The Appellant had maintained the TP Documentat....
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....The same view holds in the instant year also. 13.22 In the instant year, the TPO has taken the arm's length rate of interest as the rate charged by SBI at LIBOR plus 4.5% for entities with lowest credit rating. The appellant, in his submission dated 26.09.2017, has pointed out that the TPO had accepted that the credit rating of Jarpeno, based on Moody's Analysis, was AA and AAA which is borne out by the order of the TPO for AY 2010-11 dated 28.01.2014 filed along with the above submission. It is also observed that the TPO has not made any addition on account of the loan given to Jarpeno during AY 2011-12. The same has not been disputed by the CIT(A) in his order for AY 2010-11. In view of the above, the AO/ TPO is directed to calculate the arm's length interest by giving credit rating of AA/AAA to Jarpeno i.e. LIBOR plus 3% as mentioned at page 15 of the order of the TPO dated 26.10.2016. The ground of appeal is disposed off accordingly." 73. Against the above order, the Revenue is in appeal before us. 74. We have heard both the parties and perused the record. We find that identical issues were decided by the ld. CIT(A) in assessee's own case for earlier AYs i.e. 20....
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.... in computing the interest on the loan, the TPO applied interest rate of LIBOR plus 4.5% instead of 4% applied by the assessee. 79. Upon assessee's appeal, the Ld. CIT(A) has held as under:- "7.8 The TPO/AO has not accepted the credit rating analysis for ONGC (BTC) based on Moody's software as it has been conducted by the appellant itself and not by any independent third party. The TPO/AO has benchmarked above transaction at LIBOR + 4.5% i.e. the maximum rate of interest charged by the SBI. The appellant on the other hand has calculated the credit rating as Bl. The appellant has also submitted that a spread of only 2.42% per annum should be considered as a mark-up above the LIBOR rate on basis of the analysis conducted by the taxpayer on the LoanConnector Data Base. 7.9 It is seen that the CsIT(A) have accepted the credit rating of the AE of the taxpayer prepared on the basis of Moody's RiskCalc Plus Software in the case of Jarpeno for AYs 2012- 13 and 2013-14. No objection has been made by the TPO/AO to the credit rating filed by the appellant for ONGC (BTC) in the year under reference except that it had been prepared by the appellant itself and not by a third party. 7.10 I....